This post was prepared with the assistance of summer student Caileigh Rendek.
The G7 (Canada, France, Germany, Italy, Japan, the United States, and the United Kingdom) Finance Ministers held a two-day G7 meeting in London, England, on June 4 and 5, 2021. At the conclusion of the meeting, the G7 Finance Ministers agreed to support the collaborative efforts undertaken within the G20/Organization for Economic Co-operation and Development (OECD) Inclusive Framework on Base Erosion and Profit Shifting (Framework).
The OECD Framework aims to address tax challenges resulting from globalization and the "digitalization" of the economy. The G7 Finance Ministers will discuss global corporate tax reform at the next G20 meeting.
Two-Pillar Global Tax Solution
The Framework proposes a "two-pillar" global solution to which all members of would commit by way of multilateral convention.
The first pillar, relating to new nexus and profit allocation rules, would require the largest and most profitable multinational corporations to pay tax in countries where their goods and services are sold, not just where they have their headquarters. Global firms with at least a 10% profit margin would see 20% of their profit above the 10% margin reallocated and subject to tax in the countries in which they do business.
Under this pillar, countries such as Canada would raise more tax revenue, which helps pay for public services.
The second pillar would impose a global minimum corporate tax of at least 15% on a country-by-country basis. The stated intention of the minimum global tax is to create a fair and level playing field for businesses in the global economy and to crack down on tax avoidance and jurisdiction shopping.
Future Considerations for Global Tax Measures
Key questions still remain on the new global tax initiatives.
What criteria determine whether a company is "global" and subject to the new rules? How will the applicable countries distribute the taxed profits?
A large hurdle for the G7 to address is reconciling existing domestic digital taxation measures with a future international agreement. In their communiqué, the G7 Finance Ministers stated that they would "provide for appropriate co-ordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other similar measures, on all companies."
Discussions surrounding global tax measures will resume at the G20 Financial Ministers and Central Bank Governors Meeting, taking place on July 9 and 10, 2021, in Venice, Italy.
The G7 Finance Ministers will seek agreement among the members of the G20 and the OECD-led Framework. If they are successful in reaching an agreement, officials are optimistic that the G20 leaders will sign a final deal in October when they reconvene.
Canada's Digital Services Tax
Until an acceptable multilateral approach comes into effect, Canada's Deputy Prime Minister and Minister of Finance, Chrystia Freeland, plans to implement the Digital Services Tax (DST) announced in April.
The DST will come into effect January 1, 2022, and will amount to a 3% tax on revenue from online marketplaces, social media platforms, online advertising and user data. This tax will be in addition to the recent extension of existing GST/HST to many online transactions and services.
The proposals being developed could lead to significant changes in the overall international tax regime. The MLT Aikins taxation group will be closely monitoring developments over the next several months.
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